The scariest fact facing the board of the Reserve Bank is the 30% wage claim by Victorian teachers and police. If this ambit claim catches on we are back to the old game of wages-led-inflation, building on the overheated-economy-led-inflation we are already experiencing.

There were some gloomy housing statistics released yesterday, weaker statistics on job vacancies, a fall in company profits (from exceptionally high levels) and a slight fall in inventories to worry the GDP brigade. (Henry didn’t notice Alan Kohler making the argument that falling inventories are a clear sign of demand exceeding supply, which is usually followed by rising inflation.) Headlines like “Economy stymies rate rise” provide an obvious reason for the Reserve Bank to sit still when its board meets today.

We seem to be facing the possibility of stagflation — low or zero growth with inflation — something Economics 101 does not cover, but happens when inflationary expectations combine with weak economic activity, and often it is fear of inflation that douses the animal spirits of the punters.

This said, the work of the Reserve Bank is over for the year. Having failed to follow Henry’s advice to provide a pre-emptive 50 basis point rate hike in November, now the wait is on to see if the 25 basis point hike actually implemented proves sufficient. Henry’s hypothesis is that inflation is now out of the comfort zone.

There will be no further rate hike announced tomorrow as that would signal that last month’s decision was too cautious. Short of an extraordinary turn of events, the Board of the Reserve will not meet again until Tuesday February 6. There will be plenty of time for careful reflection over the holiday season. The December quarter consumer price index — the main economic statistic in the rate setting business — will be available by then (scheduled for release on January 24) to provide a clear test of the inflationary hypothesis.

The rest of Henry’s final comment on monetary policy for 2006 can be found here.

Henry’s Bets Friend reports that after a flurry of betting in the past 24 hours, the net effect of Labor’s leadership change seems to have reduced its chances at the next election. “It will be interesting to see if the turkeys in the Labor Party that made the push for change realise this. The roosters are no doubt aware which makes the Coalition’s odds of $1.50 pretty attractive. Where else can you get a 50% tax free return over a 10 or 11 month term?”

And, although Henry hates to sound like a scrooge, the thought of trudging around the CBD with millions of kids yelling “I WANT A NEW NINTENDO” sends shivers down his spine. Luckily, the Roy Morgan Retailer Satisfaction Monitor can help. According to the monitor, Australian Geographic shop leads the way in customer satisfaction, followed by the ABC Shop and Betta Electrical. There is a lot more information where that came from.

Read more at Henry Thornton.

Peter Fray

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